The benefits of life-long investing

Establishing a goal and devising a long-term plan can help investors stay the course in turbulent times

By: DAINA LAWRENCE

Date: June 22, 2017

When it comes to investing, no one can predict the future. But market experts agree that patience is in the best interest of the investor.

“Establishing goals and devising an investment plan can help investors achieve their financial objectives and help them ride out market fluctuations,” says Marlena Lee, head of investment research at Dimensional Fund Advisors.

“What we see over a short period of time is that you can have both negative and positive market returns,” says Ms. Lee. “But if you are invested for the long-term, the probability of having a positive market return goes up.”

She explains that the first stage of investing is about establishing a client’s financial goals. Because goals are often long-term – like retirement – an investment plan needs to support this.

Helping investors focus on the long term and understand their investment solutions can also limit the impact of emotions, so an investor can be prepared to ride out the ups and downs of the market and avoid any knee-jerk reactions.

“We believe this approach puts investors in the best position to capture what the market can offer,” says Ms. Lee.

The different stages of a person’s life may also require different approaches to investing. For example, a 35-year-old client who has many years of saving ahead may be able to take more risk and have a more aggressive portfolio. But someone approaching retirement may be more cautious about risk and want to select investment vehicles that reflect this part of his or her life cycle.

What’s important is establishing the proper balance between risk and return and developing a portfolio the investor can stick with through good and bad times. One key to that is identifying a client’s risk tolerance level.

“When you think about a portfolio for an investor, you want it to be one that they can tolerate,” explains Ms. Lee. “If a portfolio is too aggressive for a client and they can’t live with it if there is a decline in the market, then it may not be an appropriate portfolio for that client.”

Another key issue is while retirement is a long-term goal for many people, investing doesn’t stop at retirement – in fact, it shouldn’t. People are living 20 to 30 years beyond the time they stop working. To ensure their retirement savings are adequate, an individual’s portfolio has to account for increases in inflation.

“People may need to think about investments that have the potential to outpace inflation,” says Ms. Lee.

Anthony Larsen, a money coach at Money Coaches Canada in New Westminster, B.C., says it’s important to keep the “big picture” in mind when thinking about investing for the long term. “Historically, invested funds have always outperformed money sitting in a back account,” he says.

Both Mr. Larsen and Ms. Lee say taxes should be a consideration as part of a long-term plan. When an investor begins to take money out from his or her investments, those funds will be taxed. The good news about the long-term plan is that it gives ample time to prepare for tax consequences.

“Taxes are something that clients should be aware of and plan for, but they don’t have to be scary,” says Mr. Larsen.

Indeed, an advisor can play a key role in setting up a long-term plan that includes tax planning. According to Ms. Lee, “In retirement, investors consume after-tax returns, so both the return side and the tax side are important considerations that advisors can help investors think about and plan for in their portfolios.”

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